Can an Interim Resolution Professional or Resolution Professional reject prescribed claims in a corporate insolvency resolution process? – Insolvency / Bankruptcy / Restructuring

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An interesting question continues to arise regarding the powers of an interim resolution professional or a resolution professional to dismiss prescribed claims from various creditors whose debt is owed by the debtor company. The question comes up over and over again because of the Supreme Court’s observations in Swiss ribbonsCase1 that the resolution professional be given administrative rather than quasi-judicial powers. This keeps interim resolution professionals or resolution professionals in doubt whether to accept claims from different creditors, even when they are fully time-barred. Let us examine the relevant provisions and come to a conclusion on this aspect.

Relevant provisions under the IBRP Code and Regulations

Once the debtor company becomes insolvent and the Corporate Insolvency Resolution Process (CIRP) is initiated, an Interim Resolution Professional is appointed by the adjudicating authority, that is, the NCLT. Pursuant to Article 13 of the Insolvency and Bankruptcy Code of 2016 (the “Code”), the adjudicating authority makes a public announcement of the opening of the CIRP and calls for the submission of claims under under section 15 of the Code. The Provisional Resolution Professional makes a public announcement under Article 15 read with Regulation 6 of the IBBI Regulation (Insolvency Resolution Process for Legal Persons), 2016 (“CIRP Regulation”).

CIRP Regulation 6 (2) (c) requires proof of claim to be presented within 14 days2 from the date of appointment of the IRP. The different categories of proof of loss have been dealt with in chapter IV of the CIRP regulation.

Regulation 10 of the CIRP regulations empowers the provisional resolution professional or the resolution professional to request further evidence or clarification from a creditor to justify all or part of his claim.

Rule 13 of the CIRP Regulation deals with the verification of claims, which requires the provisional resolution professional or the resolution professional to verify each claim, on the date of the start of the insolvency, within seven days of the last one. date of receipt of complaints. It further requires that the provisional resolution professional or the resolution professional maintain a list of creditors containing the names of the creditors as well as the amount claimed by them, the amount of their admitted claims and the security, if any, to with respect to such claims, and update it.

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On reading the aforementioned provisions, the question that arises is whether the verification by a professional of the provisional resolution or the professional of the resolution obliges him to also verify whether the claim of the creditors of the legal debtor was time-barred as on the insolvency start date. If so, whether that Provisional Resolution Professional or Resolution Professional is empowered to reject the prescribed claim.

Applicability of the Limitation Act to the Code

The provisions of the Limitation Act, 1963 were not initially made applicable to the Code. Later, article 238A was inserted by the 2018 Law on the Insolvency and Bankruptcy Code (Second Amendment) with effect from 06.06.2018. It is interesting to note that this section 238A makes the provisions of the Limitation Act applicable to proceedings or appeals before the NCLT, NCLAT, DRT or DRAT, as the case may be. The verification of complaints by the Interim Resolution Professional or the Resolution Professional under Regulation 13 of the CIRP Rules is not specifically covered by the provisions of Article 238A of the Code. That is, the law is silent as to the applicability of the Limitation Act to the process of verifying claims by the interim resolution professional or the resolution professional.

The Interim Resolution Professional or the Resolution Professional may reject prescribed claims

We believe that while the provisions of the Limitation Act have not been specifically made applicable to Regulation 13 of the CIRP Regulations, they cannot be lost sight of. After all, once a debt is statute-barred, the debtor is protected by law itself from any legal action for the collection of that debt against him. In support of our point of view, we give the following reasons:

  1. Rule 13 (1) of the CIRP Regulation itself distinguishes between the amount claimed by creditors and the amount of their admitted claims. Therefore, the provision presupposes the application of the spirit on behalf of the Interim Resolution Professional or the Resolution Professional to admit only those claims that are legally permitted.
  1. The Code defines the term “complaint” under Article 3 (6) to mean:

a) a right to payment, whether or not that right is reduced to judgment, fixed, contested, undisputed, legal, equitable, guaranteed or unsecured;

b) right of recourse in the event of breach of contract under any applicable law, if such breach gives rise to a right to payment, whether or not this right is reduced to a judgment, fixed, expired, not expired, contested , undisputed, guaranteed or unsecured;

The definition of claim does not include a prescribed claim, as the right to payment or the right of recourse as contemplated in clauses (a) and (b) of Article 3 (6) are not available in this regard. which concerns prescribed claims.

  1. The CIRP regulation also expects the interim resolution professional or the resolution professional to determine or make the best estimate of the amount of the claim on the basis of the information at its disposal and even to revise the amounts of the claims. admitted when it encounters additional information justifying such a review. [Regulation 14 of CIRP Regulations]. Therefore, the CIRP Regulation itself requires the provisional resolution professional or the resolution professional to estimate the claim amount when a creditor’s claim is not precise and even to revise the claim amounts. admitted.
  1. The distinction made between the amount claimed by creditors and the claims admitted seems to be self-explanatory. The claim which will be admitted would be a claim supported by documents demonstrating the existence of a right to payment or to recourse as mentioned in article 3 (6) of the Code. Consequently, a prescribed claim cannot be considered a claim admitted for this purpose.
  1. The Insolvency Law Committee (Second Report) dated March 26, 2018 specifically addressed the issue of the applicability of the Limitation Act to the Code. He further observed as below:

“28.1 The Committee deliberated on the matter and unanimously agreed that the intention of the Code could not be to breathe new life into prescribed debts. It is established law that when a debt is prescribed, the right to recourse is prescribed. This needs to be read with the definition of “debt” and “claim” in the Code. Moreover, debts in liquidation proceedings cannot be time-barred, and there does not seem to be any reason to exclude the extension of this principle of law to the Code.

28.2 In addition, the non-application of the statute of limitations law creates the following problems: on the one hand, it reopens the right of financial and operational creditors holding statute-barred debts under the statute of limitations law to file a CIRP request, triggered by default of payment above INR one lakh. The purpose of the statute of limitations is “to prevent the disturbance or deprivation of what may have been acquired in equity and justice by long enjoyment or what may have been lost by inaction, negligence or breaches. from one part “. Although the Code is not debt collection law, the trigger being “default on debt” makes the exclusion from the statute of limitations counterintuitive. Second, it reopens the right of claimants (in accordance with the publication of a public notice) to file prescribed claims with the insolvency resolution professional or resolution professional, which can potentially be part of the resolution plan. resolution. Such a resolution plan restructuring debts and claims subject to limitation may not comply with the laws in force currently in force in accordance with article 30 (4) of the Code.

28.3 Since the intention was not to present the Code as a new opportunity for creditors and claimants who failed to exercise their remedy under existing laws within the prescribed limitation period, the committee considered it appropriate insert a specific section applying the Limitation Act to the Code. “

(emphasis added)

Therefore, as can be deduced from the report itself, it was never intended that prescribed claims would be admitted by the provisional resolution professional or the resolution professional where the creditors of those prescribed claims did not. not exercised their legal remedies against the Debtor Company during the limitation period.

  1. Considering that an interim resolution professional or resolution professional has no choice but to admit prescribed claims, it would be difficult to justify a logical proposition. Where claimants whose claims are prescribed by statute of limitation cannot trigger insolvency against the debtor company, such claimant should not be allowed to file their prescribed claim with the provisional resolution professional or the settlement professional. the resolution in accordance with the public announcement made under Article 15 of the Code is read together with Regulation 6 of the Rules of the CIRP. After all, what cannot be done directly should not be allowed to be done indirectly. While a creditor with a prescribed claim cannot trigger the insolvency by filing a claim under Article 7 or Article 9 of the Code, he cannot indirectly be part of the insolvency resolution process of the debtor company by filing prescribed claims before The resolution professional or the resolution professional.
  1. Allowing the settlement of a prescribed claim would be an unnecessary burden on a potential resolution claimant who intends to resuscitate the debtor business.
  1. Section 30 (2) (e) of the Code requires the resolution professional to review each resolution plan to confirm that it does not contravene any provision of the law currently in force. A resolution plan seeking to satisfy prescribed claims would be contrary to the statute of limitations.

In view of the above reasons, we are of the opinion that an Interim Resolution Professional or Resolution Professional may reject prescribed claims of creditors under Rule 13 of the CIRP Regulation. The Supreme Court’s finding that a resolution professional has only administrative powers and not quasi-judicial powers should not affect the issue raised here. Given that the Code is a relatively new law and evolves through different court decisions, it is expected that a decision in this direction will be made by the courts in the future.

Footnotes

1 Swiss Ribbons (P) Ltd. vs. Union of India, (2019) 4 SCC 17.

2 Regulation 12 (2) of July 4, 2018 now allows the submission of a claim with proof no later than the 90th day of the start date of the insolvency.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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